May Issue 2015

The China-sponsored Asia Infrastructure Investment Bank (AIIB) has so far admitted 57 countries as founding members. Prominent among them are China, India, Malaysia, Indonesia, Singapore, Thailand, Kazakhstan, Saudi Arabia, Kuwait, Oman, Qatar, Brunei, Cambodia, Laos, Myanmar, the Philippines, Vietnam,  Mongolia, Uzbekistan, Nepal, Sri Lanka, Bangladesh, Pakistan, the Maldives, New Zealand, Jordan, Tajikistan, Luxembourg, Switzerland, Britain, Australia, Austria, Brazil, Denmark, France, Germany, Italy, Netherlands, Hong Kong and Spain.

Belgium, Canada and Ukraine are considering joining the bank soon. Colombia, Japan and the United States have no immediate intention to participate. North Korea and Taiwan were rejected by China to join as Permanent Founding Members. Hungary and Taiwan are applying for ordinary membership.

If one went by the assessment of former US Secretary of the Treasury, Lawrence Summers, the US has lost its position as the sole underwriter of the global economic system the day the AIIB was launched. Wary of China’s growing ambitions and influence, the United States had advised its allies not to join the institution, but many signed up anyway. This was, undoubtedly, embarrassing for Washington.

Since World War II, the US had enjoyed the position of sole underwriter of the global economic system through its own bilateral financial clout, as well as the clout it enjoyed through the multilateral financial institutions — the World Bank and the IMF. In fact Washington used the two institutions to keep most of the world under its economic thumb all these years while promoting its own economy at the cost of most economies of Asia and Africa.

Even the Europeans were finding it increasingly impossible to get along with America’s economic hegemony. And when Japan started showing its economic teeth, the US brought it back in line by helping it float what is called the Asian Development Bank, which ostensibly was intended to help the Asian economies but, in fact, ended up playing second fiddle to the World Bank and the economic interests of the US.

The immediate reason why the concept of AIIB became so popular with the Asian, African and the European countries was the highly restrictive conditions the IMF sought to impose on most countries seeking the Fund’s help as they went under economically because of the international banking upheavals of 2008-09, when one bank after the other went bankrupt because of the profligacy of the US financial system.

Also, China was finding it increasingly difficult to promote its financial and economic culture through bilateral assistance to most of the poor African and Asian countries as the local US propagandists successfully kept scandalising such assistance as exploitative. So, China perhaps believed that it would be in a better position to ward off such propaganda if it went multilateral, spreading the risks among as many countries as possible.

Japan seems to be reluctant to join the bank not because of pressure from the US but it seems to be worried about AIIB’s decision-making mechanism and the conditions for loans which are yet to be determined. One proposal is to allocate up to 75 per cent of voting shares to regional members. The bank perhaps would exclude Pacific Ocean nations. A pan-regional approach is said to be in Japan’s interest, and it is, therefore, being advised that it can best defend this head as a member of the AIIB.

Those in the US who are in favour of joining the AIIB believe that creating the bank is not an attempt at world domination; it is, in fact, a self-imposed constraint. And the more China channels its international investments through multilateral institutions, even the ones of its own making, the lesser the risk that it will become all-dominant.

The bank’s structure is still in the making. The Memorandum of Understanding (MoU) of the AIIB to be headquartered in Beijing specifies that its authorised capital will be US$ 100 billion with an initial subscribed capital of US$ 50 billion.

Representatives of the 57 founding countries will deliberate in the next two months on the AIIB’s charter, of which the management structure will be the most important part. The chief negotiators of the countries would hold a key meeting in May to begin consultations to finalise the format of the AIIB’s functioning, including the voting share.

The Articles of Agreement (AoA) would be finalised and open for signature by Permanent Founding Members (PFMs) from June 2015 and the AIIB is expected to be fully functional by the end of 2015.

Chances of India getting the Vice President’s post are high as the vote share is expected to be based on 50 per cent Gross Domestic Product (GDP) and 50 per cent Purchasing Power Parity (PPP), with primacy to be given to the Asian countries as the bank primarily aims to fund infrastructure projects mainly in the Asian region, officials told PTI. Under these guidelines, India figures next to China and is expected to take the lead role, they said.

Chinese officials stated that the bank will draw best practices from the IMF, World Bank and ADB, but will avoid the domination of a few countries in setting rules for the international financial system.

The establishment of the AIIB is ostensibly an attempt to help fill Asia’s infrastructure investment gap and promote economic development in the region. The Asian Development Bank (ADB) estimated in 2009 that Asia needs about US$ 8 trillion worth of investment by 2020 to improve the region’s battered infrastructure to keep its economies humming.

China seems to have launched the AIIB with the additional purpose of moving beyond its labour-intensive economy and relocating some of its manufacturing industry, which is becoming uneconomic because of the rising cost of labour. Hopefully, Pakistan will benefit from this policy, especially in the textile sector, considering our expertise in this line and our relatively more economical labour costs. In fact, China could reach the rich Middle East market for its textiles from Pakistan in a shorter time and more easily, saving substantially on freight and enhancing the profit margin considerably.

China has also announced a US$ 40 billion special fund for its Silk Road projects to develop a wide network of highways, railway and ports in Asia and Africa. The Silk Road Economic Belt and the maritime Silk Road encompasses ambitious infrastructure projects to connect China’s interior with its energy suppliers in Central Asia, Africa and the Middle East, and its markets in Europe.

The success of this initiative is said to be overwhelmingly dependent on Afghanistan-Pakistan serving as a hub for regional energy markets and with reliable trade and transport links, benefiting the entire region. In this scheme, Afghanistan-Pakistan expect to become a platform for cooperation in a vast region that extends from India to Azerbaijan and beyond. There is the Lapis Lazuli Corridor as well, which would run through Afghanistan-Pakistan and Turkmenistan, across the Caspian to Georgia, and on to Turkey and Europe. China supports Afghanistan’s transition.

“This means a major opportunity for actors across the region, from Pakistan to Iran, to cash in or lose out, depending on whether they can guarantee stability for China’s investment. If they fail, not only will they miss out in the short term; they will risk being cut out of the emerging Eurasian economic architecture,” writes Andrew Small in the International New York Times.

In this context, let us take a closer look at the centre-piece of the new chapter of geo-economic relationship between China and Pakistan announced during last month’s visit of the Chinese President — the China-Pakistan Economic Corridor (CPEC).  It is a 1,200 mile rail-and-road pathway cutting by half the distance between Xinjiang, the poorest of China’s western region, and the rich European markets facilitated by the Gwadar sea-port, located in Pakistan’s poorest province, Balochistan. However, before the launch of this corridor we need to construct the GT Road patch extending from Sukkur to Gawadar which is expected to take nearly three years.

India seems to be an integral part of this emerging Asian economic equation led by China. In fact China itself has indicated on a number of occasions that it is looking forward to joining hands with India in promoting the economic interests of the Asian continent. In a message to the Indian president on India’s Republic Day, his Chinese counterpart expressed China’s willingness “to make concerted efforts with India to lift their strategic cooperative partnership oriented to peace and prosperity to a higher level.” An article on January 26 that appeared in the Global Times and People’s Daily, pointed out: “As both are emerging powers, which have the huge potential of being important forces in the international community, China and India should see more space for cooperation instead of contention.”

So it is by exploiting common grounds, like eliminating terrorist safe havens from our soil and helping Kabul establish peace and stability in Afghanistan, as well as facilitating  a transit trade route through Pakistan to India to reach the markets of Central Asia and beyond, that we can be in a position to make the most economically as China attempts to access markets world-wide in the shortest possible time.

This article was originally published in Newsline’s May 2015 issue.